Practical analysis for investment professionals
10 July 2013

How the Financial Industry Can Cure Its Willful Blindness

Willful blindness is a legal concept that is often referred to as “ignorance of the law.” It occurs when someone attempts to avoid liability by intentionally placing himself in the position to be ignorant of the fact that would then render him liable. In other words, as author Margaret Heffernan recently explained in an interview on Marketplace, “if there’s information that you could have had and should have had but somehow managed not to have, the law deems that you’re willfully blind and treats you as though you had known.” For those of you who are fans of the 1960s sitcom Hogan’s Heroes, willful blindness can be thought of as the Sergeant Schultz defense. Schultz was a guard in a German prisoner of war (POW) camp who would utter, “I hear nothing, I see nothing, I know nothing” whenever he observed Hogan and other prisoners doing things that they were not supposed to be doing.

I was unfamiliar with the term “willful blindness” until I viewed a presentation by Heffernan titled “In Defense of Whistleblowers.” According to Heffernan, whistleblowers are the antithesis of the willfully blind. Whistleblowers don’t take the path of least resistance by turning a blind eye to the wrongdoing in their organizations. Instead, they have the courage to report wrongdoing, regardless of the conflicts and retaliation that may result. In other words, whistleblowers embody leadership courage (a term popularized by the book by David Cottrell and Eric Harvey) because whistleblowers have the guts “to make tough decisions and take difficult actions.”

In reviewing the factors that precipitated the 2008 financial crisis, I am reminded of the following proverb: “There are none so blind as those who will not see.” That is, willful blindness on the part of investment professionals, financial institutions, and investors was a contributing factor to the crisis. Investment professionals and financial institutions either ignored obvious red flags about criminal and/or unethical behavior or were deliberately ignorant of it. As Heffernan writes in her book Willful Blindness: Why We Ignore the Obvious at Our Peril, the “focus on making money can circumscribe what we see and do.” When compensation systems are based solely on outcomes, little regard may be given to how those outcomes are achieved. Under pressure to reach specified goals or benchmarks, executives and managers may either explicitly or implicitly communicate to employees: “I don’t care how it gets done, as long as it gets done.”

Willful blindness may also have been encouraged by business models that are based on inherent conflicts of interests between clients and investment professionals and/or their firms. To paraphrase Heffernan, seeing dollar signs in clients’ eyes can change how investment professionals treat them and the products/services they recommend.

So, what can investors, investment professionals, and investment firms do to reduce willful blindness?


It is imperative that investors take responsibility for their investment decisions. If they don’t understand a recommended product or service or they have doubts or suspicions about it, they must resolve those issues before investing in it. If investors are unsatisfied with the answers that they receive, they should either ask more questions until they understand or they shouldn’t invest.

Recently, CFA Institute published a Statement of Investor Rights, which focuses on the conduct that investors are entitled to expect from their financial service providers. Knowingly investing in products without understanding them, ceding control of all investment decisions to others without questioning, as well as not demanding the conduct outlined in the Statement of Investor Rights are forms of a willful blindness. Ignorance or lack of understanding of the risks is no excuse.

Investment Professionals

Investment professionals must take responsibility for the investment products and services that they recommend. Clients rely on the professionals’ expertise and knowledge to make appropriate recommendations and decisions. Investment professionals must not only understand the characteristics of the investment products and services they are selling — especially considering the risks — but also be able to communicate them clearly and succinctly.

CFA Institute has also published an Integrity List that consists of 50 actionable items that investment professionals can commit to in order to restore trust in the investment industry. Incorporating these activities into your interactions with clients will go a long way toward reducing willful blindness in the industry.

Financial Institutions

Executives and managers at financial institutions need to create an organizational culture in which critical thinking, skepticism, and dissent are welcomed and encouraged. Compensation systems should be modified so that they are not solely outcomes based. In addition, executives should recognize that conformity and obedience are close friends of willful blindness.

As Stanley Milgram and other psychologists have shown, people will follow instructions even when they are asked to do things that are unethical because of the psychological pressure to do what the organization and/or supervisors want. Nonconformity and skepticism are the enemies of willful blindness. In order to “see and know,” executives and managers must seek out and surround themselves with people who are willing to challenge their beliefs and to argue with them.

In summary, restoring trust in the investment industry requires that the blind no longer lead the blind.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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About the Author(s)
Michael McMillan, CFA

Michael McMillan, CFA, was director of ethics education at CFA Institute. Previously, he was a professor of accounting and finance at Johns Hopkins University’s Carey School of Business and George Washington University’s School of Business. Prior to his career in academia, McMillan was a securities analyst and portfolio manager at Bailard, Biehl, and Kaiser and at Merus Capital Management. He is a certified public accountant (CPA) and a chartered investment counselor (CIC). McMillan holds a BA from the University of Pennsylvania, an MBA from Stanford University, and a PhD in accounting and finance from George Washington University.

3 thoughts on “How the Financial Industry Can Cure Its Willful Blindness”

  1. You have told the truth, the whole truth, and nothing but the truth, Michael. Thank you.

  2. Thanks for your careful and thoughtful comments about my work. Wilful blindness is a key issue for financial advisors of all kinds, not least because what can be positive emotions in professional relationships – loyalty, respect, affinity – can also become significant causes of blindness. Auditors, investment and financial advisors all have to be alert to it and that’s a far from easy task.

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